The U.S. Department of Justice and New York Attorney General Eric Schneiderman teamed up last week to sue J.P. Morgan in a headline-grabbing case alleging the fraudulent sale of mortgage-backed securities.

One notable detail: J.P. Morgan didn't sell the securities. The seller was Bear Stearns—yes, the same Bear Stearns that the government persuaded Morgan to buy in 2008. And, yes, the same government that is now participating in the lawsuit against Morgan to answer for stuff Bear did before the government got Morgan to buy it....

As for the federal government's role, it's helpful to recall some recent history: In the mid-2000s, Bear Stearns became—outside of Fannie Mae and Freddie Mac—perhaps the most reckless financial firm in the housing market. Bear was the smallest of the major Wall Street investment banks. But instead of allowing market punishment for Bear and its creditors when it was headed to bankruptcy, the feds decided the country could not survive a Bear failure. So they orchestrated a sale to J.P. Morgan and provided $29 billion in taxpayer financing to make it happen.

The principal author of the Bear deal was Timothy Geithner, who was then the president of the Federal Reserve Bank of New York and is now the Secretary of the Treasury. Until this week, we didn't think the Bear intervention could look any worse.

Somewhere there was a legal department fail here - I can't ever, ever imagine buying a company with Bear's reputation that was sinking into bankruptcy without doing either via an asset sale or letting the mess wash through Chapter 7 so there could be an old bank / new bank split. But Bank of America made exactly the same mistake at roughly the same time with Countrywide, so it must have appeared at the time that the government largess here (or the government pressure) was too much to ignore.

U.S. lawmakers on Wednesday interrogated J.P. Morgan Chase Chief Executive James Dimon in a much-anticipated and sometimes-heated exchange after the bank registered more than $2 billion in derivatives losses

No one grills Exxon-Mobil executives when the company loses a couple of billion to a nationalization somewhere or grills Sears executives as the blunder their way towards bankruptcy. These are private business losses. The only reason to grill JP Morgan is if Congress still considers the American taxpayer to be ultimately on the hook for trading losses (above and beyond deposit insurance requirements, which the Bear Sterns and AIG bailouts certainly were).

today, in a unanimous vote, "The U.S. futures regulator approved on Monday a rule that puts tighter limits on how brokerage firms can use customer funds, a measure that the now-bankrupt MF Global had encouraged the agency to delay." In other words, while before commingling client accounts was assumed to be a clear violation of every logical fiduciary imperative, now it is set in stone. For real. The CFTC means it.

In the past, I believed that a lot of financial regulations were honest (though often misguided) attempts to create transparent and trustworthy markets. I am increasingly being pushed to the cynical conclusion that financial regulations, like, say, licensing of funeral homes, are mainly aimed at making it impossible for small competitors to survive, while larger competitors either have the scale to pay for compliance departments, or in the case of MF Global, have the political muscle to get themselves exempted (by Administrations of both parties, I should be clear, though the current one certainly gets a hypocrisy award for standing beside OWS while handing out finance and health care law exceptions to the powerful).

MF Global is far worse in my mind than, say, Enron. In Enron's case, the management was at least mostly pursuing the activities and investments that they were supposed to be pursuing. They were making bets of the type shareholders expected, though they were likely masking the cost and risk of these bets by aggressive pushes at the margins of accounting rules.

MF Global was doing exactly what everyone supposedly knew to be an absolute no-no, ie using client funds to make leveraged bets for their own account. If Joe Schmoe in Florida did the same thing, he would already be incarcerated. In the case of MF Global, no one even seems to be interviewing Corzine and so far the bankruptcy committee has put a higher priority on repaying JP Morgan and Goldman for Corzine's bad bets than on getting investors' money back.

My friend Scott, who actually worked for Bear Stearns years ago, sent me one of the more down to earth explanations of a liquidity trap that I have heard of late. Imagine that you had a mortgage on your house for 50% of its current value. Then suppose that in this alternate mortgage world, you had to renew your mortgage every week. Most of the time, you are fine -- you still have good income and solid underlying asset values, so you get renewed with a rubber stamp. But suppose something happens - say 9/11. What happens if your renewal comes up on 9/12? It is very likely that in the chaos and uncertainty of such a time, you might have trouble getting renewed. Your income is still fine, and your asset values are fine, but you just can't get anyone to renew your loan, because they are not renewing anyone's loan until they figure out what the hell is going on in the world.

Clearly there are some very bad assets lurking on company books, as companies are still coming to terms with just how lax mortgage lending had become. But in this context, one can argue that JP Morgan got a screaming deal, particularly with the US Government bending over and cover most of the riskiest assets. Sigh, yet another government bailout of an institution "too big to fail." Just once I would like to test the "too big to fail" proposition. Why can't all those bankers take 100% losses like Enron investors or Arthur Anderson partners. Are they really too big to fail or too politically connected to fail?Anyway, Hit and Run has a good roundup of opinion.

Update: I don't want to imply that everyone gets off without cost here. The Bear Stearns investors have taken a nearly total loss - $2 a share represents a price more than 98% below where it was a year or two ago. What I don't understand is that having bought Bear's equity for essentially zero, why an additional $30 billion guarantee was needed from the government.